Income From House Property-6 | Taxation In The United States | Tax Deduction

Income From House Property

STUDY NOTE - 6
INCOME FROM HOUSE PROPERTY
This Study Note includes • Various Provisions of the Income Tax Act for computation of income under the head “Income From House Property”

Under this head, income derived from House Property by its Owner is determined. Law prescribes determination of income, being the Annual Value (S. 23) and certain deductions (S. 24) there from. Concept of ownership and restriction on deductions are prescribed.

6.1 CHARGEABILITY OF INCOME FROM HOUSE PROPERTY
(Section22) The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner is chargeable to income-tax under the head ‘Income from house property’. The exception to this rule is such portions of such property as the owner occupies for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax. The word ‘building’ is not confined in its scope only to dwelling houses. CIT v. Chennai Properties & Investments Ltd. 136 Taxman 202/266 ITR 685 (Mad.) Therefore, if the following three conditions are satisfied, income is taxable under the head “Income from house property”: (a) the property should consist of any buildings or lands appurtenant thereto ; (b) the assessee should be the owner of the property ; and (c) the property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. If any one condition is not satisfied, the property income cannot be charged to tax under the head “Income from house property”.

6.2 DEEMED OWNER

[Section 27]

In the following circumstances, not legal owners of a property, but some other person is deemed to be the owner for the purposes of including “Income from house property” in his taxable income:

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(i) Transfer to a spouse [Section 27(i)] – When transfer of house property by an individual to his or her spouse otherwise than for adequate consideration, the transferor is deemed to be the owner of the transferred property. Exception – In case of transfer to spouse in connection with an agreement to live apart, the transferor will not be deemed to be the owner. The transferee is owner of the house property and is also liable to tax on income from the property. (ii) Transfer to a minor child [Section 27(i)] – In case of transfer of house property by an individual to his or her minor child otherwise than for adequate consideration, the transferor would be deemed to be owner of the house property transferred. Exception – In case of transfer to a minor married daughter, the transferor is not deemed to be the owner. Note - Where cash is transferred to spouse/minor child and the transferee acquires property out of such cash, then the transferor shall not be treated as deemed owner of the house property. However, clubbing provisions will be attracted in case of a minor child not being minor married daughter. (iii) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a property which is not legally divisible. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. After enactment of the Hindu Succession Act, 1956 all the properties comprised in an impartible state by custom is to be assessed in the status of a HUF. However, section 27(ii) will continue to be applicable in relation to impartible estates by grant or covenant. (iv) Member of a co-operative society etc. [Section 27(iii)] – A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society/ company/ association is the legal owner of that building. (v) Person in possession of a property [Section 27(iiia)] – A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner of that house property. This would include cases where the— (1) possession of property has been handed over to the buyer (2) sale consideration has been paid or promised to be paid to the seller by the buyer (3) sale deed has not been executed in favour of the buyer, although certain other documents like power of attorney/agreement to sell/will etc. have been executed.

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Income From House Property In all the above cases, the buyer would be deemed to be the owner of the property although it is not registered in his name. (vi) Person having right in a property for a period not less than 12 years [Section 27(iiib)] – A person who acquires any rights in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that building or part thereof. Exception – Any rights by way of lease from month to month or for a period not exceeding one year.

6.3 ANNUAL VALUE

[Section 23]

It is Gross Annual Value less municipal taxes paid. Gross Annual Value of any property is determined as follows: (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable : Deduct municipal taxes - From the gross annual value computed above, deduct municipal taxes (including service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only if (a) these taxes are borne by the owner, and (b) are actually paid by him during the previous year, irrespective of the period to which it relates. Municipal taxes, levied by local authority but not paid by the assessee during the previous year, are not deductible. If property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible if such taxes are paid by the owner. The remaining amount left after deduction of municipal taxes is net annual value. Nil Annual Value Where the property consists of a house or part of a house which— (a) is in the occupation of the owner for the purposes of his own residence; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,

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the annual value of such house or part of the house is taken to be nil. [Section 23(2)] The provision of taking ‘Nil’ annual value do not apply if— (a) the house or part of the house is actually let during the whole or any part of the previous year; or (b) any other benefit therefrom is derived by the owner. Further, where the property eligible for the benefit of taking ‘Nil’ annual value consists of more than one house— (a) the benefit of taking ‘Nil’ annual value shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf; (b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined in a normal manner as if such house or houses had been let. House property is let out to employer and was allotted to the employee who had let it, benefit of self-occupation is not available - D.R. Sunder Raj v. CIT 123 ITR 471 (AP). Any partnership firm cannot get benefit of self-occupation as it cannot physically reside - CIT v. Dewan Chand Dholan Dass 132 ITR 790 (Delhi). Deductions [section 24] Standard Deduction [Sec. 24(a)] - 30 per cent of net annual value is deductible irrespective of any expenditure incurred by the taxpayer. Interest On Borrowed Capital [Sec. 24(b)] - Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. However, if the benefit of taking ‘Nil’ annual value stated in the preceding paragraph has been availed and the property is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction for interest in a year can not exceed Rs. 1,50,000. In respect of borrowings made before the 1st day of April, 1999, the amount of deduction for interest in a year can not exceed Rs. 30,000. The following are important points: (i) Interest on borrowed capital is deductible on “accrual” basis. It can only be claimed as deduction in the year of accrual

(ii) Deduction is allowed even if the interest is not actually paid during the year. (iii) Deduction is available even if neither the principal nor the interest is a charge on property.

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Income From House Property (iv) Interest on unpaid interest is not deductible [Shew Kissen Bhatterv. C/T[1973] 89ITR 61 (SC)]. (v) No deduction is allowed for any brokerage or commission for arranging the loan. (vi) Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as deduction [Circular No. 28, dated August 20, 1969]. (vii) In computing income chargeable under the head “Income from house property”, interest is not deductible in a case it is an interest chargeable under the Act in the hands of recipient and payable out of India if (i) tax has not been paid or deducted at source from such interest and (ii) in respect of such interest there is no person who may be treated as an agent [section 25]. (viii) Interest on borrowed capital is deductible fully without any maximum ceiling in the case of a let out property. (ix) Payments made towards or by way of repayment of the amount borrowed by the assessee for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” is entitled for deduction from gross total income under section 80C. It is not deductible from income from house property under section 24(b). Interest For Pre-construction Period Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual instalments, commencing from the previous year in which the house is acquired or constructed. What is pre-construction period? For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction/date of acquisition or (b) date of repayment of loan, whichever is earlier. Provisions in brief – The law governing tax incidence on self-occupied house property may be summarized as follows –

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Self-occupied house property 1. If property is used by the owner for the purpose of carrying on his business or profession.

Tax treatment Income is not taxable under the head “Income from house property”. Any income and expenditure in respect of such property will be considered while calculating “income from business or profession” under section 28

2. If property is used for the residence of the owner and his family members 2.1 If only one property is used for such purpose (a) If property is used throughout the previous year for own residential purposes, it is not let out or put to any other use (b) If property could not be occupied throughout the previous year because employment, business or profession of the owner is situated at some other place (c) When a part of the property (being independent residential unit) is self-occupied and the other part is let out (d) When property is self-occupied for a part of the year and let out for the other part of the year 2.2 If more than one property is used for residential purpose Annual value is Nil. Only interest on borrowed capital is deductible subject to a maximum of Rs. 1,50,000. Same as above.

Income from self-occupied portion as per (a) above Income from let out portion : Annual Value based on rent received less standard deduction and interest. No concession is available. The house will be taken as let out property for taxation. Only one property selected by the taxpayer will be treated as self-occupied. The remaining properties will be taxed as if let out

6.4 TAXABILITY OF RECOVERY OF UNREALISED RENT AND ARREARS OF RENT RECEIVED
(i) Unrealised rent is deducted from actual rent in determination of annual value under section 23, subject to fulfillment of conditions under Rule 4. Subsequently, when the amount is realised it gets taxed under section 25AA in the year of receipt.

(ii) If the assessee has increased the rent payable by the tenant and the same has been in

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Income From House Property dispute and later on the assessee receives the increase in rent as arrears, such arrears is assessable under section 25B. Unrealised rent [Section 25AA] (a) Taxable in the hands of the assessee whether he is the owner of that property or not. (b) Taxable as income of the previous year in which he recovers the unrealized rent. (c) No deduction is allowed. (d) Unrealised rent means the rent which has been deducted from actual rent in any previous year for determining annual value. Arrears of rent [Section 25B] Taxable in the hands of the assessee whether he is the owner of that property or not. Taxable as income of the year in which he receives the arrears of rent. 30% of the amount of arrears received is allowed as deduction. Arrears of rent is in respect of rent not charged to income-tax for any previous year.

Carry forward and set off of loss from house property (Sec-71 B) Where for any assessment year the net result of computation under the head “Income from house property” is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other head of income in accordance with the provisions of section 71 so much of the loss as has not been so set-off or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and— (i) be set off against the income from house property assessable for that assessment year; and (ii) the loss, if any, which has not been set off wholly, the amount of loss not so set off, shall be carried forward to the following assessment year, not being more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

6.5 INCOME FROM CO-OWNED PROPERTY (Sec -26)
(i) Where property is owned by two or more persons, whose shares are definite and ascertainable, then the income from such property cannot be taxed as income of an AOP.

(ii) The share income of each such co-owner should be determined in accordance with sections 22 to 25 and included in his individual assessment. (iii) Where the house property owned by co-owners is self occupied by each of the co owners, the annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a deduction under section 24(b) on account of interest on borrowed capital. (iv) Where the house property owned by co-owners is let out, the income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their respective specific share. 54
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6.6 INCOME FROM PROPERTY OWNED BY A PARTNERSHIP FIRM
(i) Where an immovable property or properties is included in the assets of a firm, the income from such property should be assessed in the hands of the firm only.

(ii) Hence, the property income cannot be assessed as income of the individual partner in respect of his share in the firm. Which Head of Income? If an assessee carries on business of purchasing and selling buildings, income received from the buildings so long as they are owned by the assessee and should be charged under the head ‘Income from house property’. It is not income from ‘Profits and gains of business or profession’ - CIT v. Chugandas & Co. 55 ITR 17 (SC). Godown was constructed and used for storing own stocks. It was later let out. The rental income derived by letting out the godown is charged as ‘Income from house property’ and is not ‘Profits and gains of business or profession’ - Parekh Traders v. CIT 150 ITR 310 (Bom.) [also 150 ITR 317 (Bom.)]. Property is used for running paying guest establishment, income from property is chargeable as business income - Manohar Singh v. CIT 58 ITR 592 (Punj.). Letting agreement reveals that main purpose was to let out property with further right of using furniture and fixtures and other common facilities, income from letting was income from house property. – Shambhu Investments (Pvt.) Ltd. 263 ITR 143 (SC) Cinema Building and furniture renting out was composite and inseparable, income from such lease is to be assessed as income from other sources and not as income from house property CIT v.D.L. Kanhere 92 ITR 535 (Bom.). Partnership business is carried on in the premises of one of the partners. The partner, as an individual, is entitled to treat that the property is used for own business. - CIT v. Rabindranath Bhol 79 Taxman 170 (Ori.). The Company owning certain property, allotted them for the occupation of its directors and other senior executives free of rent, it must be said that occupation by its employees was for the purpose of the assessee’s business. Consequently the income from such house could not be treated as income from house property and included in the assessee’s total income - CIT v. Vazir Sultan Tobacco Co. Ltd. 173 ITR 290 (AP).

6.7 CIRCUMSTANCES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX
Sl. No. Section Particulars 1 2 3 10(1) 10(20) Income from any farm house forming part of agricultural income. Income from house property of a local authority. 55 10(19A) Annual value of any one palace in the occupation of an ex-ruler.

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Income From House Property 4 5 6 7 8 9 10 10(21) 10(24) 11 13A 22 23(2) Income from house property of an approved scientific research association. Property income of any registered trade union. Income from house property held for charitable or religious purpose. Property income of any political party. Property used for own business or profession One self-occupied property of an individual/HUF (not exempt, but annual value i.e. income is taken as nil and deduction for ‘interest’ is allowed)

10(23C) Property income of universities, educational institutions, etc.

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